CONTRIBUTION MARGIN & CVP BASICS
This is the amount remaining after variable costs are subtracted from sales.
What is contribution margin?
This is the point where total revenue equals total costs.
What is break-even point?
This measures how much sales can drop before losses occur.
What is margin of safety?
This is the relative proportion of products sold.
What is sales mix?
This must be maximized when resources are limited.
What is contribution margin per unit of limited resource?
This measures how sensitive profit is to changes in sales.
What is operating leverage?
Selling price is $80 and variable cost is $50. This is the contribution margin per unit.
What is $30?
Fixed costs = $60,000
CM per unit = $20
This is break-even in units.
What is 3,000 units?
Actual sales = $500,000
Break-even = $400,000
This is margin of safety.
What is $100,000?
Product A CM = $40 (60% mix)
Product B CM = $20 (40% mix)
This is weighted average CM.
What is $32?
(24 + 8)
CM = $60
Machine hours = 3
This is CM per machine hour.
What is $20?
High operating leverage means high proportion of this cost.
What is fixed costs?
This ratio equals contribution margin divided by sales.
What is the contribution margin ratio?
Fixed costs = $100,000
CM ratio = 25%
This is break-even sales in dollars.
What is $400,000?
Actual sales = $800,000
MOS = $200,000
This is MOS ratio.
What is 25%?
Weighted average CM increases. Break-even will do this.
What is decrease?
When machine hours are limited, companies prioritize products with this.
What is highest CM per unit of constraint?
Contribution margin = $300,000
Net income = $100,000
This is degree of operating leverage.
What is 3?
If selling price is $120 and CM ratio is 40%, this is the variable cost per unit.
What is $72?
(Solution: CM = 48 → VC = 120 − 48)
Fixed costs = $90,000
CM per unit = $30
Target profit = $60,000
This is required units.
What is 5,000 units?
(Solution: 150,000 ÷ 30)
Higher margin of safety means this type of risk.
What is lower risk?
Fixed costs = $300,000
Weighted CM = $50
This is break-even units.
What is 6,000 units?
This type of constraint limits production capacity.
What is machine hours, labor hours, or materials?
Higher operating leverage makes company more sensitive to this.
What is changes in sales?
This income statement format separates variable and fixed costs and highlights contribution margin.
What is the CVP income statement?
If CM per unit increases, break-even point will do this.
What is decrease?
Company A MOS = 40%
Company B MOS = 15%
This company is safer.
What is Company A?
Selling more of high CM products will do this to profit.
What is increase profit?
Ignoring constraints will do this to profit.
What is reduce profit?
If sales increase 10% and DOL = 4, profit will increase this much.
What is 40%?
Selling price = $200
Variable cost = $120
Fixed cost = $160,000
Target profit = $80,000
This is required units.
What is 3,000 units?
(Solution: CM = 80
Required = 240,000 ÷ 80)